The system launched on Monday will make it mandatory for all category ´A´ financial institutions, or commercial banks, to fix lending rates based on base rate. First such rate should be published by all banks within mid-January, a directive issued by the central bank says.[break]
Base rate basically sets the floor for credit rates and gives borrowers a basic idea on how cheap they can get credit for. They can then tally this rate with the lending rates offered by other banks and choose the institution that is offering the best rate. Because of this reason banking institutions in many countries are not allowed to extend loans at below this rate.
Although many here had deemed the banking sector regulator to adopt similar practice, the central bank fell short of making it binding for commercial banks to extend credit at above this rate.
In a guideline on computing base rate made public on Monday, the central bank has only said: “Since the base rate does not factor in the cost of risk associated with loans, extension of credit at below this rate would raise the question on sustainability of the institution and negatively impact the financial sector.”
Nepal Rastra Bank Spokesperson Bhaskar Mani Gyawali said banks were not directed to extend credit at above the base rate as the country´s interest rate regime has already been liberalized.
“We have explained them the principle on base rate and computed formulas based on which base rate should be calculated. We have also warned them about consequences of going below the base rate while fixing lending rates. We believe banks will act responsibly,” Gyawali said. “But in case they act irresponsible and indulge in activities that put question mark on their sustainability, we will take necessary actions.”
The central bank has asked all banks to compute base rate based on cost of fund, or average deposit rate, cost of maintaining capital reserve ratio, cost of maintaining statutory liquidity ratio, administrative cost and return on assets.
Although NRB has generated different formulas to calculate administrative cost and cost of maintaining capital reserve ratio and statutory liquidity ratio, it has fixed return on assets for all banks at 0.75 percent.
“Every institution should calculate base rates based on these factors and each of them should use latest statistics available to compute the rate,” the guideline says.
Once such rate is fixed, a banking institution will be free to review it any time it wants. But banks that do not frequently revise such rates will have to do so at least once a month and publish it on their website.
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